Edgar Filing: Warner Music Group Corp.

Quarterly report for the period ended June 30, 2009

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32502

Warner Music Group Corp.

(Exact name of Registrant as specified in its charter)

Delaware

13-4271875

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

75 Rockefeller Plaza

New York, NY 10019

(Address of principal executive offices)

(212) 275-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨				Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)				Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

As of August 4, 2009, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 154,596,051.

WARNER MUSIC GROUP CORP.

INDEX


		Page
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of June 30, 2009 and September 30, 2008	3
	Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2009 and 2008	4
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2009 and 2008	5
	Consolidated Statement of Shareholders’ Deficit for the Nine Months Ended June 30, 2009	6
	Notes to Consolidated Interim Financial Statements	7
	Supplementary Information—Consolidating Financial Statements	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51
Part II.	Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Submission of Matters to a Vote of Security Holders	63
Item 5.	Other Information	63
Item 6.	Exhibits	63
Signatures		65

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	June 30, 2009			September 30, 2008
	(in millions)
Assets
Current assets:
Cash and equivalents	$	345		$	411
Accounts receivable, less allowances of $129 and $159		398			538
Inventories		50			57
Royalty advances expected to be recouped within one year		172			174
Deferred tax assets		30			30
Other current assets		54			38

Total current assets		1,049			1,248
Royalty advances expected to be recouped after one year		210			212
Investments		19			155
Property, plant and equipment, net		98			117
Goodwill		1,094			1,085
Intangible assets subject to amortization, net		1,353			1,539
Intangible assets not subject to amortization		100			100
Other assets		66			70

Total assets	$	3,989		$	4,526

Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	170		$	219
Accrued royalties		1,192			1,189
Taxes and other withholdings		12			16
Current portion of long-term debt		—			17
Deferred income		109			117
Other current liabilities		246			313

Total current liabilities		1,729			1,871
Long-term debt		1,935			2,242
Deferred tax liabilities		235			237
Other noncurrent liabilities		232			262

Total liabilities		4,131			4,612

Commitments and Contingencies (See Note 12)
Shareholders’ deficit:
Common stock ($0.001 par value; 500,000,000 shares authorized; 154,596,051 and 154,012,885 shares issued and outstanding)		—			—
Additional paid-in capital		598			590
Accumulated deficit		(768	)		(686	)
Accumulated other comprehensive income, net		28			10

Total shareholders’ deficit		(142	)		(86	)

Total liabilities and shareholders’ deficit	$	3,989		$	4,526

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2009			2008			2009			2008
	(in millions, except per share data)
Revenues	$	769		$	848		$	2,315		$	2,637
Costs and expenses:
Cost of revenues		(431	)		(441	)		(1,254	)		(1,399	)
Selling, general and administrative expenses (a)		(258	)		(300	)		(811	)		(935	)
Other income, net		—			—			—			3
Amortization of intangible assets		(55	)		(56	)		(169	)		(165	)

Total costs and expenses		(744	)		(797	)		(2,234	)		(2,496	)

Operating income from continuing operations		25			51			81			141
Interest expense, net		(61	)		(43	)		(146	)		(138	)
Minority interest (expense) income		(1	)		(2	)		6			(4	)
Gain on sale of equity investment		—			—			36			—
Gain on foreign exchange transaction		—			—			9			—
Impairment of cost-method investments		—			—			(29	)		—
Impairment of equity investment		—			—			(10	)		—
Other income (expense), net		4			(2	)		1			(4	)

(Loss) income from continuing operations before income taxes		(33	)		4			(52	)		(5	)
Income tax expense		(4	)		(13	)		(30	)		(36	)

Loss from continuing operations		(37	)		(9	)		(82	)		(41	)
Loss from discontinued operations, net of taxes		—			—			—			(21	)

Net loss	$	(37	)	$	(9	)	$	(82	)	$	(62	)

Net loss per common share:
Basic earnings per share:
Loss from continuing operations	$	(0.25	)	$	(0.06	)	$	(0.55	)	$	(0.28	)
Loss from discontinued operations		—			—			—			(0.14	)

Net loss	$	(0.25	)	$	(0.06	)	$	(0.55	)	$	(0.42	)

Diluted earnings per share:
Loss from continuing operations	$	(0.25	)	$	(0.06	)	$	(0.55	)	$	(0.28	)
Loss from discontinued operations		—			—			—			(0.14	)

Net loss	$	(0.25	)	$	(0.06	)	$	(0.55	)	$	(0.42	)

Weighted average common shares:
Basic		149.5			148.9			149.4			148.0
Diluted		149.5			148.9			149.4			148.0
(a) Includes depreciation expense of:	$	(10	)	$	(9	)	$	(27	)	$	(35	)

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended June 30, 2009			Nine Months Ended June 30, 2008
	(in millions)
Cash flows from operating activities
Net loss	$	(82	)	$	(62	)
Loss from discontinued operations, net of taxes		—			21

Loss from continuing operations		(82	)		(41	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		196			200
Deferred taxes		—			(5	)
Gain on sale of equity investment		(36	)		—
Gain on foreign exchange transaction		(9	)		—
Gain on sale of building		(3	)		—
Impairment of equity investment		10			—
Impairment of cost-method investments		29			—
Non-cash interest expense		50			35
Non-cash stock-based compensation expense		8			7
Minority interest (income) expense		(6	)		4
Other non-cash items		—			(1	)
Changes in operating assets and liabilities:
Accounts receivable		129			93
Inventories		5			4
Royalty advances		(16	)		(29	)
Accounts payable and accrued liabilities		(55	)		(59	)
Other balance sheet changes		(22	)		(23	)

Net cash provided by operating activities		198			185

Cash flows from investing activities
Repayments by (loans to) third parties		3			(3	)
Investments and acquisitions of businesses		(14	)		(122	)
Acquisition of publishing rights		(8	)		(21	)
Proceeds from the sale of investments		124			24
Proceeds from sale of building		8			—
Capital expenditures		(15	)		(26	)

Net cash provided by (used in) investing activities		98			(148	)

Cash flows from financing activities
Debt repayments (See Note 10)		(1,379	)		(13	)
Proceeds from issuance of Senior Discount Notes (See Note 10)		1,059			—
Deferred financing costs paid (See Note 10)		(23	)		—
Dividends paid		—			(42	)

Net cash used in financing activities		(343	)		(55	)
Effect of foreign currency exchange rate changes on cash		(19	)		23

Net (decrease) increase in cash and equivalents		(66	)		5
Cash and equivalents at beginning of period		411			333

Cash and equivalents at end of period	$	345		$	338

See accompanying notes.

Warner Music Group Corp.

Consolidated Statement of Shareholders’ Deficit (Unaudited)


	Shares	Value		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Shareholders’ Deficit
	(in millions, except number of common shares)
Balance at September 30, 2008	154,012,885	$	0.001	$	590	$	(686	)	$	10	$	(86	)
Comprehensive loss:
Net loss	—		—		—		(82	)		—		(82	)
Foreign currency translation adjustment	—		—		—		—			7		7
Deferred gains on derivative financial instruments	—		—		—		—			11		11

Total comprehensive loss												(64	)
Issuance of common stock upon exercise of options and issuance of shares of restricted common stock	583,166		—		8		—			—		8

Balance at June 30, 2009	154,596,051	$	0.001	$	598	$	(768	)	$	28	$	(142	)

See accompanying notes.

Warner Music Group Corp.

Notes to Consolidated Interim Financial Statements (Unaudited)

1. Description of Business

Warner Music Group Corp. (the “Company” or “Parent”) was formed by a private equity consortium of investors (the “Investor Group”) on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music-based content companies and the successor to substantially all of the interests of the recorded music and music publishing businesses of Time Warner Inc. (“Time Warner”). Effective March 1, 2004, Acquisition Corp. acquired such interests from Time Warner for approximately $2.6 billion (the “Acquisition”). The original Investor Group included affiliates of Thomas H. Lee Partners (“THL”), affiliates of Bain Capital Investors, LLC (“Bain”), affiliates of Providence Equity Partners, Inc. (“Providence”) and Music Capital Partners, L.P. (“Music Capital”). Music Capital’s partnership agreement required that the Music Capital partnership dissolve and commence winding up by the second anniversary of the Company’s May 2005 initial public offering. As a result, on May 7, 2007, Music Capital made a pro rata distribution of all shares of common stock of the Company held by it to its partners. The shares held by Music Capital had been subject to a stockholders agreement among Music Capital, THL, Bain and Providence and certain other parties. As a result of the distribution, the shares distributed by Music Capital ceased to be subject to the voting and other provisions of the stockholders agreement and Music Capital was no longer part of the Investor Group subject to the stockholders agreement.

The Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of these operations is presented below.

Recorded Music Operations

The Company’s Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, following the Acquisition the Company established Independent Label Group (“ILG”) to discover artists earlier in the process and at lower cost by leveraging the Company’s independent distribution network.

The Company is also diversifying its revenues beyond its traditional businesses by entering into expanded-rights agreements with recording artists in order to partner with artists in other areas of their careers. Under these agreements, the Company provides services to and participates in artists’ activities outside the traditional recorded music business. The Company is building artist services capabilities and platforms for exploiting a broader set of music-related rights to participate across the artist brands it helps create. In developing the Company’s artist services business, the Company has both built and expanded in-house capabilities and expertise and has acquired a number of existing artist services companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, concert promotion, fan clubs, original programming and video entertainment, including operations in the U.S., U.K., Japan, Germany, Italy, France, Spain, China and Finland. The Company believes that entering into expanded-rights agreements and enhancing its artist services capabilities will permit it to diversify revenue streams to better capitalize on the growth areas of the music industry and permit it to build stronger, long-term relationships with artists and more effectively connect artists and fans.

In the U.S., Recorded Music operations are conducted principally through the Company’s major record labels—Warner Bros. Records and The Atlantic Records Group. The Company’s Recorded Music operations also include Rhino Entertainment (“Rhino”), a division that specializes in marketing the Company’s music catalog through compilations and reissuances of previously released music and video titles, as well as in the licensing of recordings to and from third parties for various uses, including film and television soundtracks. Rhino has also become the Company’s primary licensing division focused on acquiring broader licensing rights from certain catalog artists. For example, we have an exclusive license with The Grateful Dead to manage the band’s intellectual property and in November 2007 acquired a 50% interest in Frank Sinatra Enterprises, an entity that administers licenses for use of Frank Sinatra’s name and likeness and manages all aspects of his music, film and stage content. The Company also conducts its Recorded Music operations through a collection of additional record labels, including, among others, Asylum, Bad Boy, Cordless, East West, Elektra, Nonesuch, Reprise, Roadrunner, Rykodisc, Sire and Word.

Outside the U.S., Recorded Music activities are conducted in more than 50 countries, primarily through Warner Music International (“WMI”) and its various subsidiaries, affiliates and non-affiliated licensees. WMI engages in the same activities as the Company’s U.S. labels: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, WMI also markets and distributes the records of those artists for whom the Company’s domestic record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Recorded Music activities in Canada, the U.K. and Latin America are conducted through Warner Music’s Americas and the U.K. operations. The Company’s international artist services operations also include a network of concert promoters through which WMI provides resources to coordinate tours.

Recorded Music distribution operations include WEA Corp., which markets and sells music and DVD products to retailers and wholesale distributors in the U.S.; ADA, which distributes the products of independent labels to retail and wholesale distributors in the U.S.; various distribution centers and ventures operated internationally; an 80% interest in Word Entertainment, which specializes in the distribution of music products in the Christian retail marketplace and ADA Global, which provides distribution services to independent labels outside of the U.S. through a network of affiliated and non-affiliated distributors. In April 2009, the operations of Ryko Distribution were merged with ADA. The Company acquired Ryko Distribution in 2006 as part of its acquisition of other Ryko assets including the Rykodisc label.

The Company plays an integral role in virtually all aspects of the music value chain from discovering and developing talent to producing albums and promoting artists and their products. After an artist has entered into a contract with one of the Company’s record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA and Word market, sell and deliver product, either directly or through sub-distributors and wholesalers, to record stores, mass merchants and other retailers. The Company’s recorded music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital retailers like Apple’s iTunes and mobile full-track download stores such as those operated by Verizon or Sprint. In the case of expanded-rights deals where we acquire broader rights in a recording artist’s career, we provide more comprehensive career support and actively develop new opportunities for an artist through touring, fan clubs, merchandising and sponsorships, among other areas. We believe expanded-rights deals create a better partnership with our artists which allows the Company to work together more closely with them to create and sustain artistic and commercial success.

The Company has integrated the sale of digital content into all aspects of its Recorded Music and Music Publishing businesses including A&R, marketing, promotion and distribution. The Company’s new media executives work closely with A&R departments to make sure that while a record is being made, digital assets are also created with all of our distribution channels in mind, including subscription services, social networking sites, online portals and music-centered destinations. The Company also works side by side with its mobile and online partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth for the next several years and will provide new opportunities to monetize its assets and create new revenue streams. As a music-based content company, the Company has assets that go beyond its recorded music and music publishing catalogs, such as its music video library, which it has begun to monetize through digital channels. The proportion of digital revenues attributed to each distribution channel varies by region and since digital music is in the relatively early stages of growth, proportions may change as the rollout of new technologies continues. As an owner of musical content, the Company believes it is well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of its assets.

Music Publishing Operations

Where recorded music is focused on exploiting a particular recording of a song, music publishing is an intellectual property business focused on the exploitation of the song itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rights holders, our Music Publishing business garners a share of the revenues generated from use of the song.

Our Music Publishing operations include Warner/Chappell, our global Music Publishing company headquartered in New York with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. We own or control rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, our award-winning catalog includes over 65,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative, gospel and other Christian music. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios, including Lucasfilm, Ltd., Hallmark Entertainment, Disney Music Publishing and HBO. In 2007, we entered the production music library business with the acquisition of Non-Stop Music. Production music is a complementary alternative to licensing standards and contemporary hits for television, film and advertising producers.

2. Basis of Presentation

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2009.

The consolidated balance sheet at September 30, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 (File No. 001-32502).

Basis of Consolidation

The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest entities required to be consolidated in accordance with U.S. GAAP. Significant inter-company balances and transactions have been eliminated. Certain reclassifications have been made to the prior fiscal years’ consolidated financial statements to conform with the current fiscal year presentation.

The Company maintains a 52-53 week fiscal year ending on the Friday nearest to each reporting date. As such, all references to June 30, 2009 and 2008 relate to the three- and nine-month periods ended June 26, 2009 and June 27, 2008, respectively. For convenience purposes, the Company continues to date its financial statements as of June 30.

New Accounting Pronouncements

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company adopted the provisions of FAS 157 as of October 1, 2008. The impact of adopting SFAS No. 157 effective October 1, 2008 was not material to our financial statements. Refer to Note 16.

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, (“FAS 159”)—including an Amendment of SFAS 115, which permits but does not require the Company to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted the provisions of FAS 159 as of October 1, 2008. Upon initial adoption, Statement 159 provides entities with a one-time chance to elect the fair value option for existing eligible items. The Company has elected not to apply the fair value option to the eligible items.

In December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations” (“FAS 141R”). FAS 141R changes the accounting for business combinations in several areas including contingent consideration, acquisition-related costs, restructuring costs and deferred income taxes. Acquisition costs will generally be expensed as incurred. Restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date. Changes in deferred tax asset valuation allowances and uncertain tax positions after the acquisition date will generally impact income tax expense. FAS 141R is effective for fiscal years beginning after December 15, 2008 on a prospective basis. The Company will adopt FAS 141R beginning in the first quarter of fiscal year 2010. This standard will change the Company’s accounting treatment for business combinations on a prospective basis.

In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“FAS 160”). FAS No. 160 requires the recognition of a noncontrolling (minority) interest as a component of equity in the consolidated financial statements as opposed to as a liability or mezzanine equity. FAS 160 also changes the computation of net income of a consolidated group such that earnings attributed to the noncontrolling interest will no longer be deducted in determining net income. Instead, it must be separately presented on the face of the consolidated income statement. FASB requires that FAS 160 and FAS 141R be adopted concurrently and thus, FAS 160 is also effective for fiscal years beginning after December 15, 2008. The Company will adopt the provisions of this statement beginning in the first quarter of fiscal year 2010. This standard will change the Company’s accounting treatment of business combinations with noncontrolling interests on a prospective basis, except for the presentation and disclosure requirements, which will be adopted on a retrospective basis.

3. Comprehensive Loss

Comprehensive loss consists of net loss and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net loss. For the Company, the components of other comprehensive loss primarily consist of foreign currency translation gains and losses and deferred gains and losses on financial instruments designated as hedges under FASB Statement No. 133, “Accounting for Derivative and Hedging Activities”, which include interest-rate swaps and foreign exchange contracts, as well as changes to the minimum pension liability. The following summary sets forth the components of comprehensive loss, net of related taxes (in millions):


	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008			Nine Months Ended June 30, 2009			Nine Months Ended June 30, 2008
Net loss	$	(37	)	$	(9	)	$	(82	)	$	(62	)
Foreign currency translation (losses) gains (a)		(5	)		(1	)		7			17
Derivative financial instruments gains (losses)		7			11			11			(9	)

Comprehensive loss	$	(35	)	$	1		$	(64	)	$	(54	)

(a)	The foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in international subsidiaries.

4. Net Loss Per Common Share

The Company computes net loss per common share in accordance with FASB Statement No. 128, “Earnings per Share” (“FAS 128”). Under the provisions of FAS 128, basic net loss per common share is computed by dividing the net loss applicable to common shares after preferred dividend requirements, if any, by the weighted average of common shares outstanding during the period. Diluted net loss per common share adjusts basic net loss per common share for the effects of stock options, warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. The following table sets forth the computation of basic and diluted net loss per common share (in millions, except per share amounts):


	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008			Nine Months Ended June 30, 2009			Nine Months Ended June 30, 2008
Numerator:
Basic and diluted net loss per common share:
Net loss	$	(37	)	$	(9	)	$	(82	)	$	(62	)

Denominator:
Weighted average common shares outstanding for basic calculation (a)		149.5			148.9			149.4			148.0

Weighted average common outstanding shares for diluted calculation		149.5			148.9			149.4			148.0

Net loss per common share—basic	$	(0.25	)	$	(0.06	)	$	(0.55	)	$	(0.42	)

Net loss per common share—diluted	$	(0.25	)	$	(0.06	)	$	(0.55	)	$	(0.42	)

(a)	The denominator excludes the effect of unvested common shares subject to repurchase or cancellation.

As a result of the Company’s net loss for the three and nine months ended June 30, 2009, the effect of the assumed exercise of any outstanding stock options and the assumed vesting of shares of restricted shares would have been anti-dilutive and accordingly, the following share amounts were excluded from the calculation of diluted net loss per share (in millions):


	Three Months Ended June 30, 2009	Three Months Ended June 30, 2008	Nine Months Ended June 30, 2009	Nine Months Ended June 30, 2008
Stock options	1.7	2.0	0.9	2.0
Restricted stock	0.2	2.0	0.3	1.0

During the quarter ended June 30, 2009, there was no restricted stock purchased by or awarded to certain employees of the Company that vested.

5. Significant Acquisitions and Dispositions

Acquisition of Interest in Frank Sinatra Estate

The Company acquired a 50% interest in Frank Sinatra Enterprises, LLC (“FSE”) on November 19, 2007 for $50 million. FSE is a limited liability company established to administer licenses for use of Frank Sinatra’s name and likeness and manage all aspects of his music, film and stage content. The transaction was accounted for under the purchase method of accounting, based on the provisions of FASB Interpretation No. 46 (R), “Consolidation of Variable Interest Entities” and the results of operations of FSE have been included in the Company’s results of operations from the date of the acquisition. The purchase price has been allocated to the underlying net assets acquired in proportion to the estimated fair value, principally recorded music catalog of $66 million, trademarks of $20 million and goodwill of $14 million.

Discontinued Operations

During fiscal 2008, the Company shut down the operations of Bulldog Entertainment (“Bulldog”), an entertainment services company, which was recorded in our Recorded Music operations. As a result of this triggering event, the Company performed an impairment test and determined that an $18 million impairment charge was necessary to adjust the assets to fair market value, based on the discounted value of future cash flows. The Company shut down this operation in January 2008 and recorded an additional $3 million in shut down costs during the three months ended March 31, 2008. Bulldog’s results are reported as discontinued operations in the consolidated statement of operations.

6. Investments

The Company’s investments consist of the following (in millions):


	June 30, 2009		September 30, 2008
	(unaudited)		(unaudited)
Cost-method investments	$	13	$	43
Equity-method investments		6		112

	$	19	$	155

During the three months ended March 31, 2009, the Company determined that its cost-method investments in digital venture capital companies were impaired largely due to the current economic environment and changing business conditions from the time of the initial investment. In accordance with FAS 157, the Company used Level 3 inputs to determine the fair value of these investments, which include management’s estimates of assumptions that market participants would use in pricing these assets. As a result, the Company recorded charges of $29 million, including $16 million to write off its investment in imeem, inc. (“imeem”) and $11 million to write down its investment in lala media, inc (“lala”) to its estimated fair value.

During the three months ended December 31, 2008, the Company chose not to continue its participation in Equatrax, L.P. (formerly known as Royalty Services, L.P.) and Equatrax, LLC (formerly known as Royalty Services, LLC), which were formed in 2004 to develop an outsourced royalty platform. As a result, the Company wrote off the remaining $10 million related to its investment in the joint venture.

On October 22, 2008, the Company entered into an agreement to sell its remaining equity stake in Front Line Management to Ticketmaster for $123 million in cash. The transaction closed on October 29, 2008 and the Company recorded a gain on the sale of its equity investment of $36 million for the nine months ended June 30, 2009.

7. Inventories

Inventories consist of the following (in millions):


	June 30, 2009		September 30, 2008
	(unaudited)		(unaudited)
Compact discs and other music-related products	$	48	$	55
Published sheet music and song books		2		2

	$	50	$	57

8. Goodwill and Intangible Assets

Goodwill

The following analysis details the changes in goodwill for each reportable segment during the nine months ended June 30, 2009 (in millions):


	Recorded Music		Music Publishing		Total
Balance at September 30, 2008 (unaudited)	$	494	$	591	$	1,085
Acquisitions		9		—		9

Balance at June 30, 2009 (unaudited)	$	503	$	591	$	1,094

The acquisition of goodwill primarily relates to purchase accounting adjustments recorded during the nine months ended June 30, 2009 for a few small acquisitions.

Other Intangible Assets

Other intangible assets consist of the following (in millions):


	September 30, 2008			Acquisitions	Other (a)		June 30, 2009
	(unaudited)						(unaudited)
Intangible assets subject to amortization:
Recorded music catalog	$	1,384		1	(9	)	$	1,376
Music publishing copyrights		948		8	(20	)		936
Artist contracts		76		4	(1	)		79
Trademarks		31		—	—			31
Other intangible assets		8		—	—			8

		2,447						2,430
Accumulated amortization		(908	)					(1,077	)

Total net intangible assets subject to amortization		1,539						1,353
Intangible assets not subject to amortization:
Trademarks and brands		100						100

Total net other intangible assets	$	1,639					$	1,453

(a)	Other represents foreign currency translation adjustments.

9. Restructuring Costs

Acquisition-Related Restructuring Costs

In connection with the Acquisition that was effective as of March 1, 2004, the Company reviewed its operations and implemented several plans to restructure its operations. As part of these restructuring plans, the Company recorded a restructuring liability during 2004, which included costs to exit and consolidate certain activities of the Company, costs to exit certain leased facilities and operations such as international distribution operations, costs to terminate employees and costs to terminate certain artist, songwriter, co-publisher and other contracts. Such liabilities were recognized as part of the cost of the Acquisition. As of June 30, 2009, the Company had approximately $13 million of liabilities outstanding primarily related to long-term lease obligations for vacated facilities, which are expected to be settled by 2019 and $98 million of liabilities outstanding primarily related to revaluations of artist and other contracts.

10. Debt

On May 28, 2009, Acquisition Corp. issued $1.1 billion aggregate principal amount of 9.50% Senior Secured Notes due 2016 (the “Senior Secured Notes”), pursuant to an indenture, dated as of May 28, 2009 (the “Indenture”), among Acquisition Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee. The Senior Secured Notes were issued at 96.289% of their face value, for total net proceeds of $1.059 billion, with an effective interest rate of 10.25%. The original issue discount (“OID”) was $41 million. The OID is equal to the difference between the stated principal amount and the issue price. The OID will be amortized over the term of the notes using the effective interest rate method and reported as non-cash interest expense. Financing fees of $24 million related to the Senior Secured Notes were deferred and are being amortized over the term of the notes.

The Senior Secured Notes mature on June 15, 2016. Interest on the Senior Secured Notes accrues at a rate of 9.50% per annum and is payable, commencing on December 15, 2009, semi-annually in arrears on June 15 and December 15 of each year to the holders of record on the immediately preceding June 1 and December 1. Interest on the Senior Secured Notes is computed on the basis of a 360-day year comprised of twelve 30-day months.

The Senior Secured Notes are senior secured obligations of Acquisition Corp. that rank senior in right of payment to Acquisition Corp.’s subordinated indebtedness, including its senior subordinated notes. The obligations under the Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly owned domestic subsidiaries and any such subsidiaries that guarantee other indebtedness of Acquisition Corp. in the future. The Senior Secured Notes are not guaranteed by Holdings. All obligations under the Senior Secured Notes and the guarantees of those obligations are secured by first-priority liens, subject to permitted liens, in the assets of Holdings, Acquisition Corp., and the guarantors, which consist of the shares of Acquisition Corp., Acquisition Corp.’s assets and the assets of the guarantors, except for certain excluded assets.

At any time prior to June 15, 2012, Acquisition Corp., at its option, may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes at a redemption price of 109.50% of the principal amount of the Senior Secured Notes redeemed, plus accrued and unpaid interest provided that after such redemption at least 50% of the originally issued Senior Secured Notes remain outstanding. Prior to June 15, 2013, Acquisition Corp. may redeem some or all of the Senior Secured Notes at a price equal to 100% of the principal amount plus a make whole premium, as defined in the Indenture. The Senior Secured Notes are also redeemable in whole or in part, at Acquisition Corp.’s option, at any time on or after June 15, 2013 for the following redemption prices, plus accrued and unpaid interest:


Twelve month period beginning June 15,	Percentage
2013	104.750	%
2014	102.375	%
2015 and thereafter	100.000	%

Upon the consummation and closing of a Major Music/Media Transaction, as defined in the Indenture, at any time prior to June 15, 2013, the Senior Secured Notes may be redeemed in whole or in part, at Acquisition Corp.’s option, at a redemption price of 104.75% plus accrued and unpaid interest. In the event of a change in control, as defined in the Indenture, each holder of the Senior Secured Notes may require Acquisition Corp. to repurchase some or all of the respective Senior Secured Notes at a purchase price equal to 101% plus accrued and unpaid interest.

The Indenture contains a number of covenants that, among other things, limit (subject to certain exceptions), the ability of Acquisition Corp. and most of its subsidiaries to (i) incur additional debt or issue certain preferred shares; (ii) pay dividends on or make distributions in respect of its capital stock or make other restricted payments (as defined in the Indenture); (iii) make certain investments; (iv) sell certain assets; (v) create liens on certain debt; (vi) consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; (vii) sell or otherwise dispose of its Music Publishing business; (viii) enter into certain transactions with affiliates; and (ix) designate its subsidiaries as unrestricted subsidiaries.

Acquisition Corp. used the net proceeds from the Senior Secured Notes offering, plus approximately $335 million in existing cash, to repay in full all amounts due under its existing senior secured credit facility and pay related fees and expenses. In connection with the repayment, Acquisition Corp. terminated its revolving facility. Included in interest expense for the three and nine months ended June 30, 2009 was $18 million of previously unamortized deferred financing fees related to the senior secured credit facility. Such amounts were recognized as a result of the repayment of the senior secured credit facility. There were no premiums or penalties incurred by Acquisition Corp. in connection with the termination of the senior secured credit facility.

The Company’s long-term debt consists of (in millions):


	June 30, 2009		September 30, 2008
	(unaudited)		(unaudited)
9.50% Senior Secured Notes due 2016—Acquisition Corp.(a)	$	1,059	$	—
Senior secured credit facility—Acquisition Corp (b)		—		1,379
7.375% U.S. dollar-denominated Senior Subordinated Notes due 2014—Acquisition Corp.		465		465
8.125% Sterling-denominated Senior Subordinated Notes due 2014—Acquisition Corp. (c)		164		184
9.5% Senior Discount Notes due 2014—Holdings (d)		247		231

Total debt		1,935		2,259
Less current portion		—		(17	)

Total long-term debt	$	1,935	$	2,242

(a)	9.50% Senior Secured Notes due 2016; face amount of $1.1 billion less unamortized discount of $41 million.

(b)	All outstanding amounts were repaid in full as part of the refinancing transaction described above.

(c)	Change represents the impact of foreign currency exchange rates on the carrying value of the Sterling-denominated notes.

(d)	Change represents the accrual of interest on the discount notes in the form of an increase in the accreted value of the discount notes.

Restricted Net Assets

The Company is a holding company that conducts substantially all of its business operations through its subsidiary, Acquisition Corp. and its subsidiaries. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the indenture for the Senior Secured Notes, the indenture for the 7.375% U.S. dollar-denominated Senior Subordinated Notes due 2014 and the 8.125% Sterling-denominated Senior Subordinated Notes due 2014 issued by Acquisition Corp. (collectively, the “Acquisition Corp. Senior Subordinated Notes”) and the indenture for the 9.5% Senior Discount Notes due 2014 issued by Holdings (the “Holdings Discount Notes”).

Fair Value of Debt

Based on the level of interest rates prevailing at June 30, 2009, the carrying value of the Company’s fixed-rate debt exceeded the fair value by approximately $150 million. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized for financial reporting purposes unless the debt is retired prior to its maturity.

11. Stock-based Compensation

The following table represents the expense recorded by the Company with respect to its stock-based awards for the three and nine months ended June 30, 2009 and 2008 (in millions):


	Three Months Ended June 30, 2009		Three Months Ended June 30, 2008		Nine Months Ended June 30, 2009		Nine Months Ended June 30, 2008
Recorded Music	$	2	$	2	$	5	$	4
Music Publishing		—		—		—		—
Corporate expenses		1		1		3		3

Total	$	3	$	3	$	8	$	7

During the nine months ended June 30, 2009, the Company awarded 554,700 shares of restricted stock and 2,120,000 stock options to its employees.

12. Commitments and Contingencies

Pricing of Digital Music Downloads

On December 20, 2005 and February 3, 2006, the Attorney General of the State of New York served the Company with requests for information in connection with an industry-wide investigation as to whether the practices of industry participants concerning the pricing of digital music downloads violate Section 1 of the Sherman Act, New York State General Business Law §§ 340 et seq., New York Executive Law §63(12), and related statutes. On February 28, 2006, the Antitrust Division of the U.S. Department of Justice served the Company with a request for information in the form of a Civil Investigative Demand as to whether its activities relating to the pricing of digitally downloaded music violate Section 1 of the Sherman Act. Both investigations have now been closed.

Subsequent to the announcements of the above governmental investigations, more than thirty putative class action lawsuits concerning the pricing of digital music downloads were filed and were later consolidated for pre-trial proceedings in the Southern District of New York. The consolidated amended complaint, filed on April 13, 2007, alleges conspiracy among record companies to delay the release of their content for digital distribution, inflate their pricing of CDs and fix prices for digital downloads. The complaint seeks unspecified compensatory, statutory and treble damages. All defendants, including the Company, filed a motion to dismiss the consolidated amended complaint on July 30, 2007. This motion was granted on October 9, 2008. Plaintiffs appealed the decision. The Second Circuit has scheduled oral argument for September 26, 2009. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits. Any litigation the Company may become involved in as a result of the inquiries of the Attorney General and Department of Justice, regardless of the merits of the claim, could be costly and divert the time and resources of management.

In addition to the matter discussed above, the Company is involved in other litigation arising in the normal course of business. Management does not believe that any legal proceedings pending against the Company will have, individually, or in the aggregate, a material adverse effect on its business. However, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. Regardless of the outcome, litigation can have an adverse impact on the Company, including its brand value, because of defense costs, diversion of management resources and other factors.

13. Derivative Financial Instruments

The Company uses derivative financial instruments, primarily (1) foreign currency forward exchange contracts (“FX Contracts”) for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates and (2) interest rate swap transactions (the “Interest Rate Swaps”) for the purpose of managing interest rate risk by offsetting the effects of certain floating interest rates associated with the company’s indebtedness.

The Company enters into FX Contracts primarily to hedge its royalty payments and balance sheet items denominated in foreign currency. The Company applies hedge accounting to FX Contracts for cash flows related to royalty payments. The Company records these FX Contracts in the consolidated balance sheet at fair value and changes in fair value are recognized in Other Comprehensive Income (“OCI”) for unrealized items and recognized in earnings for realized items. The Company elects to not apply hedge accounting to foreign currency exposures related to balance sheet items. The Company records these FX Contracts in the consolidated balance sheet at fair value and changes in fair value are immediately recognized in earnings. Fair value is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs). Refer to Note 16.

Netting provisions are provided for in existing International Swap and Derivative Association Inc. (“ISDA”) agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s balance sheet. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

During the nine months ended June 30, 2009, the Company did not enter into any additional Interest Rate Swaps to hedge the variability of its expected future cash interest payments. As of June 30, 2009, the Company did not have any Interest Rate Swaps outstanding and approximately $8 million of losses previously recorded in OCI have been recognized in the statement of operations. However, the Company entered into additional foreign exchange contracts to hedge its foreign currency royalty payments for the fiscal year 2009.

14. Segment Information

As discussed more fully in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: recorded music and music publishing. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment.

The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, therefore, do not themselves impact the consolidated results. Segment information consists of the following (in millions):


Three Months Ended	Recorded music			Music publishing			Corporate expenses and eliminations			Total
June 30, 2009
Revenues	$	629		$	147		$	(7	)	$	769
OIBDA		86			27			(23	)		90
Depreciation of property, plant and equipment		(6	)		(1	)		(3	)		(10	)
Amortization of intangible assets		(40	)		(16	)		1			(55	)

Operating income (loss)	$	40		$	10		$	(25	)	$	25

June 30, 2008
Revenues	$	686		$	168		$	(6	)	$	848
OIBDA		110			33			(27	)		116
Depreciation of property, plant and equipment		(5	)		(1	)		(3	)		(9	)
Amortization of intangible assets		(39	)		(17	)		—			(56	)

Operating income (loss)	$	66		$	15		$	(30	)	$	51


Nine Months Ended	Recorded music			Music publishing			Corporate expenses and eliminations			Total
June 30, 2009
Revenues	$	1,915		$	416		$	(16	)	$	2,315
OIBDA		240			102			(65	)		277
Depreciation of property, plant and equipment		(16	)		(3	)		(8	)		(27	)
Amortization of intangible assets		(121	)		(48	)		—			(169	)

Operating income (loss)	$	103		$	51		$	(73	)	$	81

June 30, 2008
Revenues	$	2,188		$	467		$	(18	)	$	2,637
OIBDA		316			108			(83	)		341
Depreciation of property, plant and equipment		(24	)		(3	)		(8	)		(35	)
Amortization of intangible assets		(115	)		(50	)		—			(165	)

Operating income (loss)	$	177		$	55		$	(91	)	$	141

15. Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $109 million and $127 million during the nine months ended June 30, 2009 and 2008, respectively. The Company paid approximately $46 million and $58 million of income and withholding taxes in the nine months ended June 30, 2009 and 2008, respectively. The Company received $9 million of income tax refunds in the nine months ended June 30, 2009 and 2008.

16. Fair Value Measurements

FAS 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

In addition to defining fair value, FAS 157 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

In accordance with the fair value hierarchy, described above, the following table shows the fair value of the Company’s financial instruments that are required to be measured at fair value as of June 30, 2009. Derivatives not designated as hedging instruments primarily represent the balances below and the gains and losses on these financial instruments are included as other expenses in the statement of operations. Derivatives designated as hedging instruments are not material to our financial statements.


	Fair Value Measurements as of June 30, 2009
	(Level 1)	(Level 2)			(Level 3)	Total
Other Current Assets:
Foreign Currency Forward Exchange Contracts (a)	—		6		—		6
Other Current Liabilities:
Foreign Currency Forward Exchange Contracts (a)	—		(12	)	—		(12	)
Other Non Current Liabilities:
Foreign Currency Forward Exchange Contracts (a)	—		(3	)	—		(3	)

Total	—	$	(9	)	—	$	(9	)

(a)	The fair value of the foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates.

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories, and property, plant, and equipment, are not required to be carried at fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that an impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite lived intangible assets.

17. Subsequent Events

The Company has performed a review of all subsequent events up to and including the date of issuance of our financial statements, August 6, 2009, and has deemed that no additional disclosures are necessary.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Financial Statements

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp.

Holdings has issued and outstanding the Holdings Discount Notes. The Holdings Discount Notes are guaranteed by the Company. These guarantees are full, unconditional, joint and several. The following consolidating financial statements are presented for the information of the holders of the Holdings Discount Notes and present the results of operations, financial position and cash flows of (i) the Company, which is the guarantor of the Holdings Discount Notes, (ii) Holdings, which is the issuer of the Holdings Discount Notes, (iii) the subsidiaries of Holdings (Acquisition Corp. is the only direct subsidiary of Holdings) and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis. Investments in consolidated subsidiaries are presented under the equity method of accounting.

The Company and Holdings are holding companies that conduct substantially all their business operations through Acquisition Corp. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the indenture for the Senior Secured Notes, the indenture for the Acquisition Corp. Senior Subordinated Notes and the indenture for the Holdings Discount Notes.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (unaudited)

June 30, 2009


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.		Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	98		$	—		$	247	$	—	$	345
Accounts receivable, net		—			—			398		—		398
Inventories		—			—			50		—		50
Royalty advances expected to be recouped within one year		—			—			172		—		172
Deferred tax assets		—			—			30		—		30
Other current assets		—			—			54		—		54

Total current assets		98			—			951		—		1,049
Royalty advances expected to be recouped after one year		—			—			210		—		210
Investments in and advances (from) to consolidated subsidiaries		(241	)		3			—		238		—
Investments		—			—			19		—		19
Property, plant and equipment, net		—			—			98		—		98
Goodwill		—			—			1,094		—		1,094
Intangible assets subject to amortization, net		—			—			1,353		—		1,353
Intangible assets not subject to amortization		—			—			100		—		100
Other assets		(2	)		3			65		—		66

Total assets	$	(145	)	$	6		$	3,890	$	238	$	3,989

Liabilities and Shareholders’ (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	170	$	—	$	170
Accrued royalties		—			—			1,192		—		1,192
Taxes and other withholdings		2			—			10		—		12
Deferred income		—			—			109		—		109
Other current liabilities		—			—			246		—		246

Total current liabilities		2			—			1,727		—		1,729
Long-term debt		—			247			1,688		—		1,935
Deferred tax liabilities, net		—			—			235		—		235
Other noncurrent liabilities		(5	)		—			237		—		232

Total liabilities		(3	)		247			3,887		—		4,131

Shareholders’ (deficit) equity		(142	)		(241	)		3		238		(142	)

Total liabilities and shareholders’ (deficit) equity	$	(145	)	$	6		$	3,890	$	238	$	3,989

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (unaudited)

September 30, 2008


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.		Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	98		$	—		$	313	$	—	$	411
Accounts receivable, net		—			—			538		—		538
Inventories		—			—			57		—		57
Royalty advances expected to be recouped within one year		—			—			174		—		174
Deferred tax assets		—			—			30		—		30
Other current assets		—			—			38		—		38

Total current assets		98			—			1,150		—		1,248
Royalty advances expected to be recouped after one year		—			—			212		—		212
Investments in and advances (from) to consolidated subsidiaries		(185	)		43			—		142		—
Investments		—			—			155		—		155
Property, plant and equipment, net		—			—			117		—		117
Goodwill		—			—			1,085		—		1,085
Intangible assets subject to amortization, net		—			—			1,539		—		1,539
Intangible assets not subject to amortization		—			—			100		—		100
Other assets		—			3			67		—		70

Total assets	$	(87	)	$	46		$	4,425	$	142	$	4,526

Liabilities and Shareholders’ (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	219	$	—	$	219
Accrued royalties		—			—			1,189		—		1,189
Taxes and other withholdings		2			—			14		—		16
Current portion of long-term debt		—			—			17		—		17
Deferred income		—			—			117		—		117
Other current liabilities		1			—			312		—		313

Total current liabilities		3			—			1,868		—		1,871
Long-term debt		—			231			2,011		—		2,242
Deferred tax liabilities, net		—			—			237		—		237
Other noncurrent liabilities		(4	)		—			266		—		262

Total liabilities		(1	)		231			4,382		—		4,612

Shareholders’ (deficit) equity		(86	)		(185	)		43		142		(86	)

Total liabilities and shareholders’ (deficit) equity	$	(87	)	$	46		$	4,425	$	142	$	4,526

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (unaudited)


	Three Months Ended June 30, 2009
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	769		$	—	$	769
Costs and expenses:
Cost of revenues		—			—			(431	)		—		(431	)
Selling, general and administrative expenses		—			—			(258	)		—		(258	)
Other income		—			—			—			—		—
Amortization of intangible assets		—			—			(55	)		—		(55	)

Total costs and expenses		—			—			(744	)		—		(744	)

Operating income		—			—			25			—		25
Interest expense, net		—			(5	)		(56	)		—		(61	)
Minority interest expense		—			—			(1	)		—		(1	)
Other (expense) income, net		(37	)		(32	)		4			69		4

(Loss) income from continuing operations before income taxes		(37	)		(37	)		(28	)		69		(33	)
Income tax expense		—			—			(4	)		—		(4	)

Net (loss) income from continuing operations		(37	)		(37	)		(32	)		69		(37	)
Loss from discontinuing operations		—			—			—			—		—

Net (loss) income	$	(37	)	$	(37	)	$	(32	)	$	69	$	(37	)


	Three Months Ended June 30, 2008
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	848		$	—	$	848
Costs and expenses:
Cost of revenues		—			—			(441	)		—		(441	)
Selling, general and administrative expenses		—			—			(300	)		—		(300	)
Other income		—			—			—			—		—
Amortization of intangible assets		—			—			(56	)		—		(56	)

Total costs and expenses		—			—			(797	)		—		(797	)

Operating income		—			—			51			—		51
Interest expense, net		—			(5	)		(38	)		—		(43	)
Minority interest expense		—			—			(2	)		—		(2	)
Other (expense) income, net		(9	)		(4	)		(2	)		13		(2	)

(Loss) income from continuing operations before income taxes		(9	)		(9	)		9			13		4
Income tax expense		—			—			(13	)		—		(13	)

Net (loss) income from continuing operations		(9	)		(9	)		(4	)		13		(9	)
Loss from discontinuing operations		—			—			—			—		—

Net (loss) income	$	(9	)	$	(9	)	$	(4	)	$	13	$	(9	)

WARNER MUSIC GROUP CORP.

Consolidating Statements of Operations (unaudited)

Supplementary Information


	Nine Months Ended June 30, 2009
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	2,315		$	—	$	2,315
Costs and expenses:
Cost of revenues		—			—			(1,254	)		—		(1,254	)
Selling, general and administrative expenses		—			—			(811	)		—		(811	)
Other income		—			—			—			—		—
Amortization of intangible assets		—			—			(169	)		—		(169	)

Total costs and expenses		—			—			(2,234	)		—		(2,234	)

Operating income		—			—			81			—		81
Interest expense, net		—			(16	)		(130	)		—		(146	)
Minority interest income		—			—			6			—		6
Gain on sale of equity investment		—			—			36			—		36
Gain on foreign exchange transaction		—			—			9			—		9
Impairment of cost investments		—			—			(29	)		—		(29	)
Impairment of equity investment		—						(10	)		—		(10	)
Other (expense) income, net		(82	)		(66	)		1			148		1

(Loss) income from continuing operations before income taxes		(82	)		(82	)		(36	)		148		(52	)
Income tax expense		—			—			(30	)		—		(30	)

Net (loss) income from continuing operations		(82	)		(82	)		(66	)		148		(82	)
Loss from discontinuing operations		—			—			—			—		—

Net (loss) income	$	(82	)	$	(82	)	$	(66	)	$	148	$	(82	)


	Nine Months Ended June 30, 2008
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	2,637		$	—	$	2,637
Costs and expenses:
Cost of revenues		—			—			(1,399	)		—		(1,399	)
Selling, general and administrative expenses		—			—			(935	)		—		(935	)
Other income		—			—			3			—		3
Amortization of intangible assets		—			—			(165	)		—		(165	)

Total costs and expenses		—			—			(2,496	)		—		(2,496	)

Operating income		—			—			141			—		141
Interest expense, net		—			(15	)		(123	)		—		(138	)
Minority interest expense		—			—			(4	)		—		(4	)
Gain on sale of equity investment		—			—			—			—		—
Gain on foreign exchange transaction		—			—			—			—		—
Impairment of equity investment		—			—			—			—		—
Other (expense) income, net		(62	)		(47	)		(4	)		109		(4	)

(Loss) income from continuing operations before income taxes		(62	)		(62	)		10			109		(5	)
Income tax expense		—			—			(36	)		—		(36	)

Net (loss) income from continuing operations		(62	)		(62	)		(26	)		109		(41	)
Loss from discontinuing operations		—			—			(21	)		—		(21	)

Net (loss) income	$	(62	)	$	(62	)	$	(47	)	$	109	$	(62	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (unaudited)

For The Nine Months Ended June 30, 2009


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(82	)	$	(82	)	$	(66	)	$	148		$	(82	)
Loss from discontinued operations		—			—			—			—			—

(Loss) income from continuing operations		(82	)		(82	)		(66	)		148			(82	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			—			196			—			196
Deferred taxes		—			—			—			—			—
Gain on sale of equity investment		—			—			(36	)		—			(36	)
Gain on foreign exchange transaction		—			—			(9	)		—			(9	)
Gain on sale of building		—			—			(3	)		—			(3	)
Impairment of equity investment		—			—			10			—			10
Impairment of cost-method investments		—			—			29			—			29
Non-cash interest expense		—			16			34			—			50
Non-cash, stock-based compensation expense		—			—			8			—			8
Minority interest income		—			—			(6	)		—			(6	)
Other non-cash items		82			66			—			(148	)		—
Changes in operating assets and liabilities:
Accounts receivable		—			—			129			—			129
Inventories		—			—			5			—			5
Royalty advances		—			—			(16	)		—			(16	)
Accounts payable and accrued liabilities		—			—			(55	)		—			(55	)
Other balance sheet changes		—			—			(22	)		—			(22	)

Net cash provided by (used in) operating activities		—			—			198			—			198

Cash flows from investing activities:
Repayment of loans by third parties		—			—			3			—			3
Investments and acquisitions of businesses		—			—			(14	)		—			(14	)
Acquisition of publishing rights		—			—			(8	)		—			(8	)
Proceeds from the sale of investments		—			—			124			—			124
Proceeds from sale of building		—			—			8			—			8
Capital expenditures		—			—			(15	)		—			(15	)

Net cash provided by investing activities		—			—			98			—			98

Cash flows from financing activities:
Debt repayments		—			—			(1,379	)		—			(1,379	)
Proceeds from issuance of Senior Discount Notes		—			—			1,059			—			1,059
Deferred Financing costs paid		—			—			(23	)		—			(23	)

Net cash used in financing activities		—			—			(343	)		—			(343	)

Effect of foreign currency exchange rate changes on cash		—			—			(19	)		—			(19	)

Net (decrease) in cash and equivalents		—			—			(66	)		—			(66	)
Cash and equivalents at beginning of period		98			—			313			—			411

Cash and equivalents at end of period	$	98		$	—		$	247		$	—		$	345

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (unaudited)

For The Nine Months Ended June 30, 2008


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(62	)	$	(62	)	$	(47	)	$	109		$	(62	)
Loss from discontinued operations		—			—			21			—			21

(Loss) income from continuing operations		(62	)		(62	)		(26	)		109			(41	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		—			—			200			—			200
Deferred taxes		—			—			(5	)		—			(5	)
Gain on sale of equity investment		—			—			—			—			—
Gain on sale of foreign exchange transaction		—			—			—			—			—
Impairment of equity investment		—			—			—			—			—
Non-cash interest expense		—			15			20			—			35
Non-cash stock compensation expense		—			—			7			—			7
Minority interest expense		—			—			4			—			4
Other non-cash items		62			47			(1	)		(109	)		(1	)
Changes in operating assets and liabilities:
Accounts receivable		—			—			93			—			93
Inventories		—			—			4			—			4
Royalty advances		—			—			(29	)		—			(29	)
Accounts payable and accrued liabilities		—			—			(59	)		—			(59	)
Other balance sheet changes		(9	)		—			(14	)		—			(23	)

Net cash (used in) provided by operating activities		(9	)		—			194			—			185

Cash flows from investing activities:
Loans to third parties		—			—			(3	)		—			(3	)
Investments and acquisitions of businesses		—			—			(122	)		—			(122	)
Acquisition of publishing rights		—			—			(21	)		—			(21	)
Proceeds from the sale of investments		—			—			24			—			24
Capital expenditures		—			—			(26	)		—			(26	)

Net cash used in investing activities		—			—			(148	)		—			(148	)

Cash flows from financing activities:
Debt repayments		—			—			(13	)		—			(13	)
(Decrease) increase in intercompany		7			—			(7	)		—			—
Dividends paid		(42	)		(68	)		(68	)		136			(42	)
Return of capital received		68			68			—			(136	)		—

Net cash provided by (used in) financing activities		33			—			(88	)		—			(55	)

Effect of foreign currency exchange rate changes on cash		—			—			23			—			23

Net increase (decrease) in cash and equivalents		24			—			(19	)		—			5
Cash and equivalents at beginning of period		74			—			259			—			333

Cash and equivalents at end of period	$	98		$	—		$	240		$	—		$	338

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2009 (the “Quarterly Report”). This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements.

We maintain an Internet site at www.wmg.com. We use our website as a channel of distribution for material company information. Financial and other material information regarding Warner Music Group is routinely posted on and accessible at http://investors.wmg.com. In addition, you may automatically receive email alerts and other information about Warner Music Group by enrolling your email by visiting the “email alerts” section at http://investors.wmg.com. We make available on our website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as soon as practicable after we electronically file such reports with the Securities and Exchange Commission (the “SEC”). Our website and the information posted on it or connected to it shall not be deemed to be incorporated by reference into this communication.

This Quarterly Report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Quarterly Report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs, cost savings, industry trends and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Such statements include, among others, statements regarding our ability to develop talent and attract future talent, our ability to reduce future capital expenditures, our ability to monetize our music content, including through new distribution channels and formats to capitalize on the growth areas of the music industry, our ability to effectively deploy our capital, the development of digital music and the effect of digital distribution channels on our business, including whether we will be able to achieve higher margins from digital sales, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music industry, our success in limiting piracy, our ability to compete in the highly competitive markets in which we operate, the growth of the music industry and the effect of our and the music industry’s efforts to combat piracy on the industry, our intention to pay quarterly dividends, our ability to fund our future capital needs and the effect of litigation on us. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Additionally, important factors could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report. As stated elsewhere in this Quarterly Report, such risks, uncertainties and other important factors include, among others:

•

the impact of our substantial leverage on our ability to raise additional capital to fund our operations, on our ability to react to changes in the economy or our industry and on our ability to meet our obligations under our indebtedness;

•

the continued decline in the global recorded music industry and the rate of overall decline in the recorded music industry;

•

current uncertainty in global economic conditions could adversely affect our prospects and our results of operations;

•

our ability to continue to identify, sign and retain desirable talent at manageable costs;

•

the threat posed to our business by piracy of music by means of home CD-R activity, peer-to-peer file-sharing and sideloading of unauthorized content;

•

the significant threat posed to our business and the music industry by organized industrial piracy;

•

the popular demand for particular recording artists and/or songwriters and albums and the timely completion of albums by major recording artists and/or songwriters;

•

the diversity and quality of our portfolio of songwriters;

•

the diversity and quality of our album releases;

•

significant fluctuations in our results of operations and cash flows due to the nature of our business;

•

our involvement in intellectual property litigation;

•

the possible downward pressure on our pricing and profit margins;

•

the seasonal and cyclical nature of recorded music sales;

•

our ability to continue to enforce our intellectual property rights in digital environments;

•

the ability to develop successful business models applicable to a digital environment and to enter into expanded-rights agreements with recording artists in order to broaden our revenue streams in growing segments of the music business;

•

the impact of heightened and intensive competition in the recorded music and music publishing businesses and our inability to execute our business strategy;

•

risks associated with our non-U.S. operations, including limited legal protections of our intellectual property rights and restrictions on the repatriation of capital;

•

the impact of legitimate digital music distribution or the introduction of other new music distribution formats;

•

the reliance on a limited number of online music stores and their ability to significantly influence the pricing structure for online music stores;

•

the impact of rate regulations on our Recorded Music and Music Publishing businesses;

•

the impact of rates on other income streams that may be set by arbitration proceedings on our business;

•

the impact an impairment in the carrying value of goodwill or other intangible and long-lived assets could have on our operating results and shareholders’ equity;

•

risks associated with the fluctuations in foreign currency exchange rates;

•

our ability and the ability of our joint venture partners to operate our existing joint ventures satisfactorily;

•

the enactment of legislation limiting the terms by which an individual can be bound under a “personal services” contract;

•

potential loss of catalog if it is determined that recording artists have a right to recapture recordings under the U.S. Copyright Act;

•

changes in law and government regulations;

•

trends that affect the end uses of our musical compositions (which include uses in broadcast radio and television, film and advertising businesses);

•

the growth of other products that compete for the disposable income of consumers;

•

risks inherent in relying on one supplier for manufacturing, packaging and distribution services in North America and Europe;

•

risks inherent in our acquiring or investing in other businesses including our ability to successfully manage new businesses that we may acquire as we diversify revenue streams within the music industry;

•

the fact that we have engaged in substantial restructuring activities in the past, and may need to implement further restructurings in the future and our restructuring efforts may not be successful;

•

the fact that we are outsourcing certain back office functions, such as IT infrastructure and development, which will make us more dependent upon third parties;

•

the possibility that our owners’ interests will conflict with ours or yours;

•

failure to attract and retain key personnel; and

•

the effects associated with the formation of Live Nation Entertainment.

There may be other factors not presently known to us or which we currently consider to be immaterial that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report. We disclaim any duty to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

INTRODUCTION

Warner Music Group Corp. was formed by the Investor Group on November 21, 2003. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. Acquisition Corp. is one of the world’s major music companies and the successor to substantially all of the interests of the recorded music and music publishing businesses of Time Warner. Effective March 1, 2004, Acquisition Corp. acquired such interests from Time Warner for approximately $2.6 billion. The original Investor Group included THL, Bain, Providence and Music Capital. Music Capital’s partnership agreement required that the Music Capital partnership dissolve and commence winding up by the second anniversary of the Company’s May 2005 initial public offering. As a result, on May 7, 2008, Music Capital made a pro rata distribution of all shares of common stock of the Company held by it to its partners. The shares held by Music Capital had been subject to a stockholders agreement among Music Capital, THL, Bain and Providence and certain other parties. As a result of the distribution, the shares distributed by Music Capital ceased to be subject to the voting and other provisions of the stockholders agreement and Music Capital was no longer part of the Investor Group subject to the stockholders agreement.

The Company and Holdings are holding companies that conduct substantially all of their business operations through their subsidiaries. The terms “we,” “us,” “our,” “ours,” and the “Company” refer collectively to Warner Music Group Corp. and its consolidated subsidiaries, except where otherwise indicated.

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the unaudited financial statements and footnotes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. MD&A is organized as follows:

•

Overview. This section provides a general description of our business, as well as recent developments that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.

•

Results of operations. This section provides an analysis of our results of operations for the three and nine months ended June 30, 2009 and 2008. This analysis is presented on both a consolidated and segment basis.

•

Financial condition and liquidity. This section provides an analysis of our cash flows for the nine months ended June 30, 2009 and 2008, as well as a discussion of our financial condition and liquidity as of June 30, 2009. The discussion of our financial condition and liquidity includes a summary of our key debt compliance measures under our debt agreements.

Use of OIBDA

We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (which we refer to as “OIBDA”). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide cash flows to service debt. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income, net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In addition, our definition of OIBDA may differ from similarly titled measures used by other companies. A reconciliation of consolidated historical OIBDA to operating income and net income (loss) is provided in our “Results of Operations.”

Use of Constant Currency

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. We calculate constant-currency by calculating prior-year results using current year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as “excluding the impact of foreign currency exchange rates.” These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with U.S. GAAP.

OVERVIEW

We are one of the world’s major music content companies. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of each of those operations is presented below.

Recorded Music Operations

Our Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, following the Acquisition we established ILG to discover artists earlier in the process and at a lower cost by leveraging our independent distribution network.

We are also diversifying our revenues beyond our traditional businesses by entering into expanded-rights agreements with recording artists in order to partner with artists in other areas of their careers. Under these agreements, we provide services to and participates in artists’ activities outside the traditional recorded music business. We are building artist services capabilities and platforms for exploiting a broader set of music-related rights to participate across the artist brands it helps create. In developing our artist services business, we have both built and expanded in-house capabilities and expertise and have acquired a number of existing artist services companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, concert promotion, fan clubs, original programming and video entertainment, including operations in the U.S., U.K., Japan, Germany, Italy, France, Spain, China and Finland. We believe that entering into expanded-rights agreements and enhancing our artist services capabilities will permit us to diversify revenue streams to better capitalize on the growth areas of the music industry and permit us to build stronger, long-term relationships with artists and more effectively connect artists and fans.

In the U.S., our Recorded Music operations are conducted principally through our major record labels—Warner Bros. Records and The Atlantic Records Group. Our Recorded Music operations also include Rhino, a division that specializes in marketing our music catalog through compilations and reissuances of previously released music and video titles, as well as in the licensing of recordings to and from third parties for various uses, including film and television soundtracks. Rhino has also become our primary licensing division focused on acquiring broader licensing rights from certain catalog artists. For example, we have an exclusive license with The Grateful Dead to manage the band’s intellectual property and in November 2007 acquired a 50% interest in Frank Sinatra Enterprises, an entity that administers licenses for use of Frank Sinatra’s name and likeness and manages all aspects of his music, film and stage content. The Company also conducts its Recorded Music operations through a collection of additional record labels, including, among others, Asylum, Bad Boy, Cordless, East West, Elektra, Nonesuch, Reprise, Roadrunner, Rykodisc, Sire and Word.

Outside the U.S., our Recorded Music activities are conducted in more than 50 countries primarily through WMI and its various subsidiaries, affiliates and non-affiliated licensees. WMI engages in the same activities as our U.S. labels: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, WMI also markets and distributes the records of those artists for whom our domestic record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Recorded Music activities in Canada, the U.K. and Latin America are conducted though Warner Music’s Americas and the U.K. operations. The Company’s international artist services operations also include a network of concert promoters through which WMI provides resources to coordinate tours.

Our Recorded Music distribution operations include WEA Corp, which markets and sells music and DVD products to retailers and wholesale distributors in the U.S.; ADA, which distributes the products of independent labels to retail and wholesale distributors in the U.S.; various distribution centers and ventures operated internationally; an 80% interest in Word Entertainment, which specializes in the distribution of music products in the Christian retail marketplace and ADA Global, which provides distribution services outside of the U.S. through a network of affiliated and non-affiliated distributors. In April 2009, the operations of Ryko Distribution were merged with ADA. The Company acquired Ryko Distribution in 2006 as part of its acquisition of other Ryko assets including the Rykodisc label.

The Company plays an integral role in virtually all aspects of the music value chain from discovering and developing talent to producing albums and promoting artists and their products. After an artist has entered into a contract with one of the Company’s record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA and Word market, sell and deliver product, either directly or through sub-distributors and wholesalers, to record stores, mass merchants and other retailers. The Company’s recorded music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital retailers like Apple’s iTunes and mobile full-track download stores such as those operated by Verizon or Sprint. In the case of expanded–rights deals where we acquire broader rights in a recording artist’s career, we may provide more comprehensive career support and actively develop new opportunities for an artist through touring, fan clubs, merchandising and

sponsorships, among other areas. We believe expanded-rights deals create a better partnership with our artists which allows the Company to work together more closely with them to create and sustain artistic and commercial success.

The Company has integrated the sale of digital content into all aspects of its Recorded Music and Music Publishing businesses including A&R, marketing, promotion and distribution. The Company’s new media executives work closely with A&R departments to make sure that while a record is being made, digital assets are also created with all of our distribution channels in mind, including subscription services, social networking sites, online portals and music-centered destinations. The Company also works side by side with its mobile and online partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth for the next several years and will provide new opportunities to monetize its assets and create new revenue streams. As a music-based content company, the Company has assets that go beyond its recorded music and music publishing catalogs, such as its music video library, which it has begun to monetize through digital channels. The proportion of digital revenues attributed to each distribution channel varies by region and since digital music is in the relatively early stages of growth, proportions may change as the roll out of new technologies continues. As an owner of musical content, the Company believes it is well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of its assets.

Recorded Music revenues are derived from three main sources:

•

Physical and other: the rightsholder receives revenues with respect to sales of physical products such as CDs and DVDs. We are also diversifying our revenues beyond sales of physical products and receive other revenues from our artist services business and our participation in expanded rights associated with our artists and other artists, including sponsorship, fan club, websites, merchandising, touring, ticketing and artist and brand management;

•

Digital: the rightsholder receives revenues with respect to online and mobile downloads, mobile ringtones and online and mobile streaming; and

•

Licensing: the rightsholder receives royalties or fees for the right to use the sound recording in combination with visual images such as in films or television programs, television commercials and videogames.

The principal costs associated with our Recorded Music operations are as follows:

•

Royalty costs and artist and repertoire costs—the costs associated with (i) paying royalties to artists, producers, songwriters, other copyright holders and trade unions, (ii) signing and developing artists, (iii) creating master recordings in the studio and (iv) creating artwork for album covers and liner notes;

•

Product costs—the costs to manufacture, package and distribute product to wholesale and retail distribution outlets as well as those principal costs related to expanded rights;

•

Selling and marketing costs—the costs associated with the promotion and marketing of artists and recorded music products, including costs to produce music videos for promotional purposes and artist tour support; and

•

General and administrative costs—the costs associated with general overhead and other administrative costs.

Music Publishing Operations

Publishing revenues are derived from five main sources:

•

Mechanical: the licensor receives royalties with respect to compositions embodied in recordings sold in any physical format or configuration (e.g., CDs and DVDs);

•

Performance: the licensor receives royalties if the composition is performed publicly through broadcast of music on television, radio, cable and satellite, live performance at a concert or other venue (e.g., arena concerts, nightclubs), online and wireless streaming and performance of music in staged theatrical productions;

•

Synchronization: the licensor receives royalties or fees for the right to use the composition in combination with visual images such as in films or television programs, television commercials and videogames as well as from other uses such as in toys or novelty items and merchandise;

•

Digital: the licensor receives royalties or fees with respect to online and mobile downloads, mobile ringtones and online and mobile streaming; and

•

Other: the licensor receives royalties for other uses such as in sheet music.

The principal costs associated with our Music Publishing operations are as follows:

•

Artist and repertoire costs—the costs associated with (i) signing and developing songwriters and (ii) paying royalties to songwriters, co-publishers and other copyright holders in connection with income generated from the exploitation of their copyrighted works; and

•

General and administrative costs—the costs associated with general overhead and other administrative costs.

Factors Affecting Results of Operations and Financial Condition

Market Factors

Since 1999, the recorded music industry has been in transition and the worldwide market has contracted considerably, which has adversely affected our operating results. The industry-wide decline can be attributed to digital piracy, the bankruptcies of record retailers and wholesalers, growing competition for consumer discretionary spending and retail shelf space and the maturation of the CD format, which has slowed the historical growth pattern of recorded music sales. While CD sales still generate most of the recorded music revenues, CD sales continue to decline industry-wide and we expect that trend to continue. While new formats for selling recorded music product have been created, including the legal downloading of digital music online and the distribution of music on mobile devices, significant revenue streams from these new formats are just beginning to emerge and have not yet reached a level where they offset the declines in CD sales. The recorded music industry performance may continue to negatively impact our operating results. In addition, a declining recorded music industry could continue to have an adverse impact on the music publishing business. This is because our Music Publishing business generates a portion of its revenues from mechanical royalties received from the sale of music in physical recorded music formats such as the CD.

Current ongoing uncertainty in global economic conditions poses a risk to the overall economy, which has negatively affected demand for our products and other related matters. The current uncertainty in global economic conditions makes it particularly difficult to predict future product demand and other related matters and makes it more likely that our actual results could differ materially from our expectations. Even in the midst of the global economic slowdown, we remain committed to executing on our strategic initiatives and plan to continue our transformation to adapt to the changing music industry in order to maximize cash flow and profitability. Given this economic slowdown, we continue to be conservative and focus on increasing cash and liquidity. We will monitor current events closely and take advantage of our flexible cost structure to minimize any impact.

Settlements

In September 2006, the major record companies reached a global out-of-court settlement of copyright litigation against the operators of the KaZaA peer-to-peer network. Under the terms of the settlement, the KaZaA defendants agreed to pay compensation to the record companies that brought the action, including us. We recorded approximately $13 million of other income related to this settlement in the fiscal year ended September 30, 2006. These amounts were recorded net of the estimated amounts payable to our artists in respect of royalties. The cash related to this settlement was received in the first quarter of fiscal 2008. We recorded approximately $3 million of other income in conjunction with a contingent payment received related to this settlement in fiscal year 2008.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008

Consolidated Historical Results

Revenues

Our revenues were composed of the following amounts (in millions):


	For the Three Months Ended June 30,						*2009 vs. 2008*
	2009			2008			$ Change			% Change
Revenue by Type
Physical and other	$	416		$	469		$	(53	)	-11	%
Digital		163			156			7		4	%
Licensing		50			61			(11	)	-18	%

Total Recorded Music		629			686			(57	)	-8	%
Mechanical		43			59			(16	)	-27	%
Performance		58			69			(11	)	-16	%
Synchronization		29			25			4		16	%
Digital		16			10			6		60	%
Other		1			5			(4	)	-80	%

Total Music Publishing		147			168			(21	)	-13	%
Intersegment elimination		(7	)		(6	)		(1	)	17	%

Total Revenues	$	769		$	848		$	(79	)	-9	%

Revenue by Geographical Location
U.S. Recorded Music	$	284		$	319		$	(35	)	-11	%
U.S. Publishing		54			58			(4	)	-7	%

Total U.S.		338			377			(39	)	-10	%
International Recorded Music		345			367			(22	)	-6	%
International Publishing		93			110			(17	)	-15	%

Total International		438			477			(39	)	-8	%
Intersegment eliminations		(7	)		(6	)		(1	)	17	%

Total Revenues	$	769		$	848		$	(79	)	-9	%

Total Revenues

Total revenues decreased by $79 million, or 9%, to $769 million for the three months ended June 30, 2009 from $848 million for the three months ended June 30, 2008. Recorded Music and Music Publishing revenues represented 81% and 19% of total revenues for the three months ended June 30, 2009, respectively, compared to 80% and 20% for the three months ended June 30, 2008, respectively, prior to intersegment eliminations. U.S. and international revenues represented 44% and 56% of total revenues for the three months ended June 30, 2009 and 2008, respectively. Excluding the unfavorable impact of foreign currency exchange rates, total revenues decreased $16 million, or 2%, for the three months ended June 30, 2009.

Total digital revenues increased by $9 million, or 5%, to $175 million for the three months ended June 30, 2009 from $166 million for the three months ended June 30, 2008. Total digital revenues represented 23% and 20% of consolidated revenues for the three months ended June 30, 2009 and 2008, respectively. Total digital revenues prior to intersegment elimination for the three months ended June 30, 2009 were comprised of U.S. revenues of $116 million, or 66% of total digital revenues, and international revenues of $63 million, or 36% of total digital revenues. Excluding the unfavorable impact of foreign currency exchange rates, total digital revenues increased by $17 million, or 11%, for the three months ended June 30, 2009.

of $7 million. Digital revenue continued to increase as the transition from physical sales to digital sales in the recorded music industry continues, but the rate of growth in the current-year quarter was negatively impacted by the timing of our release schedule, the timing and success of new product introductions and continued worldwide economic pressures. As digital revenues become a greater percentage of overall revenues, fluctuations in digital revenues between periods is becoming increasingly driven by the timing of releases. Excluding the unfavorable impact of foreign currency exchange rates, total Recorded Music revenues decreased $10 million, or 2%, for the three months ended June 30, 2009.

Music Publishing revenues decreased by $21 million, or 13%, to $147 million for the three months ended June 30, 2009 from $168 million for the three months ended June 30, 2008. The decrease was due primarily to declines in mechanical and performance revenues, which reflected recessionary pressures and the effects of the industry-wide decrease in physical sales. Excluding the unfavorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $7 million, or 5%, for the three months ended June 30, 2009.

Revenue by Geographical Location

U.S. revenues decreased by $39 million, or 10%, to $338 million for the three months ended June 30, 2009 from $377 million for the three months ended June 30, 2008 primarily due to a decrease of $28 million in physical and other revenues. The overall decline in the U.S. Recorded Music business was the result of our fiscal fourth quarter-weighted release, general economic pressures and the transition from physical sales to digital sales.

International revenues decreased by $39 million, or 8%, to $438 million for the three months ended June 30, 2009 from $477 million for the three months ended June 30, 2008 due in part to decreases of $25 million in physical and other revenues and $7 million in mechanical revenues which were driven by continued contracting demand for physical product by retailers. In addition, the prior-year quarter reflected a strong release schedule in Japan. Offsetting these decreases were $4 million from increased digital revenues and increased revenues from the company’s European concert promotion business.

Cost of revenues

Our cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2009 vs. 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	265	$	298	$	(33	)	-11	%
Product costs		149		132		17		13	%
Licensing costs		17		11		6		55	%

Total cost of revenues	$	431	$	441	$	(10	)	-2	%

Our cost of revenues decreased by $10 million, or 2%, to $431 million for the three months ended June 30, 2009 from $441 million for the three months ended June 30, 2008. Expressed as a percentage of revenues, cost of revenues were 56% and 52% for the three months ended June 30, 2009 and 2008, respectively.

Artist and repertoire costs as a percentage of revenues slightly decreased to 34% for the three months ended June 30, 2009, from 35% for the three months ended June 30, 2008. The decrease in artist and repertoire costs was driven by decreased revenues for the current-year quarter as a result of our fiscal fourth quarter-weighted release schedule, which in turn, resulted in decreased artist and repertoire spending. The decrease as a percentage of revenues reflected the continuing change in mix from the sale of physical products to new forms of digital revenues, partially offset by higher royalty expense related to certain artist profit-sharing agreements.

Product costs increased as a percentage of revenues from 16% in the prior-year quarter to 19% in the current-year quarter. This increase was driven primarily by international production costs associated with our European concert promotions business. This increase was partially offset by a decrease in product costs due primarily to change in mix from the sale of physical products to new forms of digital music.

Licensing costs increased $6 million, or 55%, to $17 million for the three months ended June 30, 2009 from $11 million for the three months ended June 30, 2008, and licensing costs represented 34% and 18% of licensing revenues for the three months ended June 30, 2009 and 2008, respectively. The increase was driven primarily by changes in revenue mix.

Selling, general and administrative expenses

Our selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2009 vs. 2008*
	2009		2008		$ Change			% Change
General and administrative expense (1)	$	128	$	145	$	(17	)	-12	%
Selling and marketing expense		114		136		(22	)	-16	%
Distribution expense		16		19		(3	)	-16	%

Total selling, general and administrative expense	$	258	$	300	$	(42	)	-14	%

(1)	Includes depreciation expense of $10 million and $9 million for the three months ended June 30, 2009, and 2008, respectively.

Total selling, general and administrative expense decreased by $42 million, or 14%, to $258 million for the three months ended June 30, 2009 from $300 million for the three months ended June 30, 2008. Expressed as a percentage of revenues, selling, general and administrative expenses decreased from 35% in the prior-year quarter to 34% in the current-year quarter.

General and administrative expenses remained flat at 17% as a percentage of revenues for the current-year quarter and prior-year quarter. The dollar decrease in general and administrative expense was primarily the result of our continued cost-management efforts, resulting in decreased IT and consulting costs, and lower compensation expense.

Selling and marketing expense decreased by $22 million, or 16%, to $114 million for the three months ended June 30, 2009 from $136 million for the three months ended June 30, 2008. This decrease was primarily the result of our efforts to better align selling and marketing expenses with revenues earned. Expressed as a percentage of revenues, selling and marketing expense decreased to 15% for the three months ended June 30, 2009 from 16% for the three months ended June 30, 2008.

Distribution expense decreased by $3 million, or 16%, to $16 million for the three months ended June 30, 2009 from $19 million for the three months ended June 30, 2008. This decrease was primarily the result of decreased sales of physical products.

Reconciliation of Consolidated Historical OIBDA to Operating Income from Continuing Operations and Net Loss

As previously described, we use OIBDA as our primary measure of financial performance. The following table reconciles OIBDA to operating income, and further provides the components from operating income to net loss for purposes of the discussion that follows (in millions):


	For the Three Months Ended June 30,						*2009 vs. 2008*
	2009			2008			$ Change			% Change
OIBDA	$	90		$	116		$	(26	)	-22	%
Depreciation expense		(10	)		(9	)		(1	)	11	%
Amortization expense		(55	)		(56	)		1		-2	%

Operating income from continuing operations		25			51			(26	)	-51	%
Interest expense, net		(61	)		(43	)		(18	)	42	%
Other income (expense), net		3			(4	)		7		—

(Loss) income from continuing operations before income taxes		(33	)		4			(37	)	—
Income tax expense		(4	)		(13	)		9		69	%

Loss from continuing operations		(37	)		(9	)		(28	)	—
Loss from discontinued operations, net of taxes		—			—			—		—

Net loss	$	(37	)	$	(9	)	$	(28	)	—

OIBDA

Our OIBDA decreased by $26 million to $90 million for the three months ended June 30, 2009 as compared to $116 million for the three months ended June 30, 2008. Expressed as a percentage of revenues, total OIBDA margin was 12% for the three months ended June 30, 2009 as compared to 14% for the three months ended June 30, 2008. The decline in OIBDA is primarily a result of a decline in revenues. Our decreased OIBDA margin was primarily the result of declines in Japan related to the recession and the timing of releases in that territory, partially offset by the effect of the company-wide cost-management efforts.

See “Business Segment Results” presented hereinafter for a discussion of OIBDA by business segment.

Depreciation expense

Our depreciation expense increased by $1 million, or 11%, to $10 million for three months ended June 30, 2009.

Amortization expense

Amortization expense decreased by $1 million, or 2%, to $55 million for the three months ended June 30, 2009.

Operating income from continuing operations

Our operating income from continuing operations decreased $26 million, or 51%, to $25 million for the three months ended June 30, 2009 as compared to $51 million for the prior-year quarter. The decrease in operating income was due to the decline in OIBDA noted above.

Interest expense, net

Our interest expense, net, increased $18 million, or 42%, to $61 million for the three months ended June 30, 2009 as compared to $43 million for the three months ended June 30, 2008. The increase was due to the write-off of $18 million of previously unamortized deferred financing fees related to the senior secured credit facility, which we repaid in full in the current-year quarter.

See “—Financial Condition and Liquidity” for more information.

Other income (expense), net

The three months ended June 30, 2009 included the gain on the sale of a building. The three months ended June 30, 2008 reflected currency exchange movements associated with inter-company receivables and payables that were short term in nature and realized gains and losses on certain foreign currency hedging activities.

Income tax expense

We provided income tax expense of $4 million and $13 million for the three months ended June 30, 2009 and 2008, respectively. The decrease in the income tax expense primarily related to a decrease in income earned by our foreign affiliates compared to the prior-year quarter.

During the quarter ended March 31, 2009, we settled our federal income tax audit with the IRS for the fiscal years ended September 30, 2004 through September 30, 2006. The IRS has now commenced its audit of the fiscal years ended September 30, 2008 and September 30, 2007. Various tax years are currently under examination by state and local and foreign tax authorities. With respect to open examinations, we do not expect the total reserve for uncertain tax positions to change significantly in the next twelve months.

Loss from continuing operations

Our loss from continuing operations increased by $28 million, to $37 million for the three months ended June 30, 2009 as compared to $9 million for the three months ended June 30, 2008. The increase was the result of a decrease in OIBDA and an increase in interest expense due to the write-off of deferred financing fees as noted above, partially offset by a decrease in income tax expense.

Business Segment Results

Revenues, OIBDA and operating income (loss) by business segment are as follows (in millions):


	For the Three Months Ended June 30,						*2009 vs. 2008*
	2009			2008			$ Change			% Change
Recorded Music
Revenues	$	629		$	686		$	(57	)	-8	%
OIBDA		86			110			(24	)	-22	%
Operating income from continuing operations	$	40		$	66		$	(26	)	-39	%

Music Publishing
Revenues	$	147		$	168		$	(21	)	-13	%
OIBDA		27			33			(6	)	-18	%
Operating income from continuing operations	$	10		$	15		$	(5	)	-33	%

Corporate expenses and eliminations
Revenues	$	(7	)	$	(6	)	$	(1	)	17	%
OIBDA		(23	)		(27	)		4		-15	%
Operating loss from continuing operations	$	(25	)	$	(30	)	$	5		-17	%

Total
Revenues	$	769		$	848		$	(79	)	-9	%
OIBDA		90			116			(26	)	-22	%
Operating income from continuing operations	$	25		$	51		$	(26	)	-51	%

Recorded Music

Revenues

Recorded Music revenues decreased by $57 million, or 8%, to $629 million for the three months ended June 30, 2009 from $686 million for the three months ended June 30, 2008. The decrease in Recorded Music revenues primarily reflected our fiscal fourth quarter-weighted release schedule, general economic pressures and the transition from physical sales to digital sales in the recorded music industry. Licensing revenue decrease of $11 million was primarily a result of general economic pressures which led to reduced advertising spending. Additionally, the weak global economy and retail environment, particularly in Japan and to a lesser extent Latin America, continued to have an impact on our results. These decreases were partially offset by an increase in concert promotion revenues, primarily related to our European concert promotion business and an increase in digital revenues of $7 million. Digital revenue continued to increase as the transition from physical sales to digital sales in the recorded music industry continues but the rate of growth in the current-year quarter was negatively impacted by the timing of our release schedule, the timing and success of new product introductions and continued worldwide economic pressures. As digital revenues become a greater percentage of overall revenues, fluctuations in digital revenues between periods is becoming increasingly driven by the timing of releases. Excluding the unfavorable impact of foreign currency exchange rates, total Recorded Music revenues decreased $10 million, or 2%, for the three months ended June 30, 2009.

OIBDA and Operating Income from Continuing Operations

Recorded Music OIBDA was $86 million for the three months ended June 30, 2009 as compared to $110 million for the three months ended June 30, 2008. Recorded Music operating income from continuing operations included the following (in millions):


	For the Three Months Ended June 30,						*2009 vs. 2008*
	2009			2008			$ Change			% Change
OIBDA	$	86		$	110		$	(24	)	-22	%
Depreciation and amortization		(46	)		(44	)		(2	)	5	%

Operating income from continuing operations	$	40		$	66		$	(26	)	-39	%

Recorded Music OIBDA decreased by $24 million, or 22%, to $86 million for the three months ended June 30, 2009 compared to $110 million for the three months ended June 30, 2008. Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA was 14% and 16% for the three months ended June 30, 2009 and 2008, respectively. The decline in OIBDA margin was primarily the result of declines in Japan related to the recession and the timing of releases in that territory, partially offset by the effect of continued company-wide cost-management efforts.

Recorded Music operating income from continuing operations decreased by $26 million primarily due to the decreases in Recorded Music OIBDA described above.

Recorded Music cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2009 vs. 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	166	$	185	$	(19	)	-10	%
Product costs		149		132		17		13	%
Licensing costs		17		10		7		70	%

Total cost of revenues	$	332	$	327	$	5		2	%

Cost of revenues

Our Recorded Music cost of revenues increased by $5 million, or 2%, to $332 million for the three months ended June 30, 2009 from $327 million for the three months ended June 30, 2008. Expressed as a percentage of revenues, cost of revenues were 53% and 48% for the three months ended June 30, 2009 and 2008, respectively. The increase was driven by international production costs associated with our concert promotions business. The increase was partially offset by decreased artist and repertoire spending, which was a result of our fiscal fourth quarter-weighted release schedule and continuing change in mix from the sales of physical products to new forms of digital revenues.

Recorded Music selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2009 vs. 2008*
	2009		2008		$ Change			% Change
General and administrative expense (1)	$	89	$	103	$	(14	)	-14	%
Selling and marketing expense		112		133		(21	)	-16	%
Distribution expense		16		18		(2	)	-11	%

Total selling, general and administrative expense	$	217	$	254	$	(37	)	-15	%

(1)	Includes depreciation expense of $6 million and $5 million for the three months ended June 30, 2009 and 2008, respectively.

Selling, general and administrative expense

Recorded Music selling, general and administrative expense decreased $37 million, or 15%, for the three months ended June 30, 2009. This decrease was primarily the result of our efforts to better align selling and marketing expenses with revenues earned, the timing of our releases, the effect of continued cost-management efforts, lower compensation expense and decreased distribution expense commensurate with the reduction of physical product sales. Expressed as a percentage of Recorded Music revenues, selling, general and administrative expenses were 34% and 37% for the three months ended June 30, 2009 and 2008, respectively.

Music Publishing

Revenues

Music Publishing revenues decreased by $21 million, or 13%, to $147 million for the three months ended June 30, 2009 compared to $168 million for the three months ended June 30, 2008. Prior to intersegment eliminations, Music Publishing revenues represented 19% and 20% of consolidated revenues, for the three months ended June 30, 2009 and 2008, respectively. International Music Publishing revenues were $93 million and $110 million, or 63% and 65% of consolidated Music Publishing revenues for the three months ended June 30, 2009 and 2008, respectively. The decrease was primarily due to declines in mechanical revenues of $16 million and performance revenues of $11 million, which reflected recessionary pressures and the effects of the industry-wide decrease in physical sales. These decreases were partially offset by increased digital and synchronization revenues. Excluding the unfavorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $7 million, or 5%, for the three months ended June 30, 2009.

OIBDA and Operating Income from Continuing Operations

Music Publishing operating income from continuing operations decreased to $10 million for the three months ended June 30, 2009 as compared to $15 million for the three months ended June 30, 2008. Music Publishing operating income from continuing operations includes the following (in millions):


	For the Three Months Ended June 30,						*2009 vs. 2008*
	2009			2008			$ Change			% Change
OIBDA	$	27		$	33		$	(6	)	-18	%
Depreciation and amortization		(17	)		(18	)		1		-6	%

Operating income from continuing operations	$	10		$	15		$	(5	)	-33	%

Music Publishing OIBDA declined to $27 million for the three months ended June 30, 2009 from $33 million for the three months ended June 30, 2008, respectively. Expressed as a percentage of Music Publishing revenues, Music Publishing OIBDA was 18% and 20% for the three months ended June 30, 2009 and 2008, respectively. The decline in margin was due primarily to recessionary pressures and the timing of royalty payments.

Music Publishing cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended June 30,				*2009 vs. 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	107	$	121	$	(14	)	-12	%

Total cost of revenues	$	107	$	121	$	(14	)	-12	%

Cost of revenues

Music Publishing cost of revenues decreased by $14 million for the three months ended June 30, 2009. Expressed as a percentage of Music Publishing revenues, cost of revenues were 73% and 72% for the three months ended June 30, 2009 and 2008, respectively. The decrease was primarily due to the decline in revenues.

Music Publishing selling, general and administrative expenses are comprised of the following amounts (in millions):


	For the Three Months Ended June 30,				*2009 vs. 2008*
	2009		2008		$ Change			% Change
General and administrative expense (1)	$	14	$	15	$	(1	)	-7	%

Total selling, general and administrative expense	$	14	$	15	$	(1	)	-7	%

(1)	Includes depreciation expense of $1 million for the three months ended June 30, 2009 and 2008, respectively.

Selling, general and administrative expense

Music Publishing selling, general and administrative expense decreased by $1 million for the three months ended June 30, 2009.

Corporate Expenses and Eliminations

Corporate expenses and eliminations decreased by $4 million for the three months ended June 30, 2009 primarily as a result of lower compensation expense.

Nine Months Ended June 30, 2009 Compared with Nine Months Ended June 30, 2008

Consolidated Historical Results

Revenues

Our revenues were composed of the following amounts (in millions):


	For the Nine Months Ended June 30,						*2009 vs. 2008*
	2009			2008			$ Change			% Change
Revenue by Type
Physical and Other	$	1,262		$	1,576		$	(314	)	-20	%
Digital		485			443			42		9	%
Licensing		168			169			(1	)	-1	%

Total Recorded Music		1,915			2,188			(273	)	-12	%
Mechanical		130			177			(47	)	-27	%
Performance		166			180			(14	)	-8	%
Synchronization		76			71			5		7	%
Digital		38			28			10		36	%
Other		6			11			(5	)	-45	%

Total Music Publishing		416			467			(51	)	-11	%
Intersegment elimination		(16	)		(18	)		2		-11	%

Total Revenues	$	2,315		$	2,637		$	(322	)	-12	%

Revenue by Geographical Location
U.S. Recorded Music	$	867		$	1,016		$	(149	)	-15	%
U.S. Publishing		159			169			(10	)	-6	%

Total U.S.		1,026			1,185			(159	)	-13	%
International Recorded Music		1,048			1,172			(124	)	-11	%
International Publishing		257			298			(41	)	-14	%

Total International		1,305			1,470			(165	)	-11	%
Intersegment eliminations		(16	)		(18	)		2		-11	%

Total Revenues	$	2,315		$	2,637		$	(322	)	-12	%

Total Revenues

Total revenues decreased by $322 million, or 12%, to $2,315 million for the nine months ended June 30, 2009 from $2,637 million for the nine months ended June 30, 2008. Recorded Music and Music Publishing revenues represented 82% and 18% of total revenues for the nine months ended June 30, 2009, and for the nine months ended June 30, 2008, respectively, prior to intersegment eliminations. U.S. and international revenues represented 44% and 56% of total revenues for the nine months ended June 30, 2009, respectively, compared to 45% and 55% for the nine months ended June 30, 2008, respectively. Excluding the unfavorable impact of foreign currency exchange rates, total revenues decreased $151 million, or 6%, for the nine months ended June 30, 2009.

Total digital revenues increased by $48 million, or 10%, to $519 million for the nine months ended June 30, 2009 from $471 million for the nine months ended June 30, 2008. Total digital revenues represented 22% and 18% of consolidated revenues for the nine months ended June 30, 2009 and 2008, respectively. Total digital revenues for the nine months ended June 30, 2009 were comprised of U.S. revenues of $340 million, or 65% of total digital revenues, and international revenues of $183 million, or 35% of total digital revenues. Total digital revenues for the nine months ended June 30, 2008 were comprised of U.S. revenues of $307 million, or 65% of total digital revenues, and international revenues of $164 million, or 35% of total digital revenues. Excluding the unfavorable impact of foreign currency exchange rates, total digital sales increased by $65 million, or 14%, for the nine months ended June 30, 2009.

Recorded Music revenues decreased by $273 million, or 12%, to $1,915 million for the nine months ended June 30, 2009 from $2,188 million for the nine months ended June 30, 2008. The decrease in Recorded Music revenues primarily reflected our fiscal fourth quarter-weighted release schedule, general economic pressures and the transition from physical sales to digital sales in the recorded music industry. These decreases were partially offset by an increase in concert promotion revenues, primarily related to our Eur

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